Moody’s Ratings (Moody’s) has today downgraded Mobico Group PLC’s (Mobico) long-term issuer rating to Baa3 from Baa2. At the same time, the rating agency downgraded the company’s £1.5 billion backed senior unsecured medium term note (MTN) programme to (P)Baa3 from (P)Baa2, its £250 million backed senior unsecured medium term notes due 2028 and its €500 million backed senior unsecured medium term notes due 2031 to Baa3 from Baa2. The ratings of its £500 million perpetual subordinated non-call fixed rate reset notes were downgraded to Ba2 from Ba1. All ratings were also placed on review for downgrade. Previously, the outlook was negative.
Today’s rating action reflects:
• The company’s weaker operating performance in 2023 compared with Moody’s expectations
• Its very high gross debt / EBITDA ratio, standing at 8.7x as at 31 December 2023 on a Moody’s-adjusted basis including non-cash exceptional costs or 6.3x only including cash exceptional costs, that Moody’s nonetheless expects will improve below 5x over the next 6-12 months through earnings improvement and reduced one-offs
• Uncertainty with regard to timing and amount of the potential proceeds from the planned disposal of the North American School Bus business, the impact of the renewal of the long haul concession in Spain (due in 2027) on the profitability of the group, as the effect of the potential refinancing of the hybrid notes on its key credit metrics
Moody’s review will focus on (i) Mobico’s operating performance in the first half of 2024, (ii) the amount of the proceeds and the timing of the planned disposal of the North American school bus business, iii) the company’s plans regards the refinancing of the hybrid notes, (iv) the sustainability of the revenue and earnings of ALSA in view of the potential retendering of the long haul concession in 2027, and (v) an evaluation of the current and forecasted operating trends and free cash flow generation.
RATINGS RATIONALE
Mobico’s Baa3 long-term issuer rating reflects (i) a high proportion (over 70%) of contracted and concession revenues independent of passenger demand; (ii) a range of material support from various national and local governments demonstrated during the pandemic and continuing in some markets with respect to subsidies for converting the fleet to zero emission vehicles (ZEVs), but offset by the difficulties in passing on inflationary pressure through regulated price increases over the last two years; (iii) diversified geographic presence, with significant revenue from North America, the UK, Spain, and Germany, as offset by the increasing dependency of earnings on the profitability of the Spanish operations; (iv) a moderate financial policy.
Mobico’s credit profile remains constrained by (i) about 30% of revenues derived from variable passenger demand; (ii) ongoing cost pressures notably around wages; (iii) large non-revenue-generating capital investment needed to make its fleet more environmentally friendly, which constrains cash generation; (iv) growing dependence on the ALSA Spanish business, which generated 73% of company-adjusted underlying operating profit before central functions in 2023 vs 48% in 2022, (v) weak prospects of earnings growth elsewhere; and (vi) currently stretched credit metrics that significantly deviate from the company’s stated financial policy.
Moody’s-adjusted debt to EBITDA was 8.7x at December 2023, up from 5.4x at December 2022, or 6.3x only including cash exceptional costs. Other debt metrics were also weak for the Baa3 rating, with Moody’s-adjusted (FFO+interest)/interest of 3.5x compared with 5.5x in 2022, and Moody’s-adjusted RCF/net debt of 10% compared with 17% in 2022. Free cash flow, as defined by Moody’s was positive by £10 million for the year.
The deterioration in the debt metrics reflects charges to the German Rail onerous contract provisions, restructuring costs, higher driver recruitment costs in the North American school bus business, as well as some slowdown in demand in UK buses and in NXTS, its private hire coach business. To offset these challenges, the company announced an additional £20 million cost reduction program, in addition to the £30 million cost cutting effort already under way, and price increases.
Despite some improvement, Mobico’s key credit ratios will remain weak for the Baa3 rating over the next 6-12 months in the absence of asset disposals. The rating agency currently anticipates that leverage, measured in terms of Moody’s-adjusted gross debt to EBITDA, will reduce below 5x over the next 6-12 months, from earnings growth and a lower level of one-offs. However, leverage is likely to remain above pre-pandemic levels.
To accelerate deleveraging, Mobico announced in October that it plans to sell its North American School Bus business. The company stated that the disposal process is underway and that the potential proceeds are “expected to be used in line with the existing financial plan, with the principal objective to delever”.
ESG CONSIDERATIONS
Mobico has significant exposure to environmental risks, driven by carbon transition and pollution risks related to its transportation fleet (including higher capex), and to social risks in connection with regulatory pricing pressure and rising personnel costs. In terms of governance, the company has operated outside its stated financial policy and stated that the timeline of its net leverage reduction, to its target of 1.5x-2x from 3x at the moment based on its covenant definition, has shifted to 2027 from 2024.
LIQUIDITY
As at 31 December 2023, Mobico’s liquidity position is good, with £356 million of cash and equivalents on balance sheet and an unused £600 million revolving credit facility maturing in July 2028. The rating agency expects that cumulative free cash flow over the next two years will be negative by £45-50 million, assuming no dividends to shareholders.
The rating agency currently factors in the refinancing of the company’s £500 million Perpetual Subordinated Non-Call Fixed Rate Reset Notes (the subordinated “Hybrid Notes”) well ahead of the first call date in November 2025. Mobico’s other debt maturities include private placements worth a combined £405 million, due between 2027 and 2032.
These Hybrid Notes are currently rated Ba2, i.e. two notches below the company’s senior unsecured rating of Baa3, reflecting their features. These notes are perpetual, deeply subordinated, and Mobico can opt to defer coupons on a cumulative basis. In Moody’s view, the Hybrid Notes have equity-like features that allow them to receive basket ‘M’ treatment (i.e. 50% equity and 50% debt) for the purpose of adjusting financial statements. Please refer to Moody’s Cross-Sector Rating Methodology “Hybrid Equity Credit” (February 2024) for further details.
The company has two key bank covenant tests: a <3.5x test for gearing and a >3.5x test for interest cover. At 31 December 2023, covenant gearing was 3.0x (2.8x in 2022) and interest cover was 5.2x (8.6x in 2022). The increase in the covenant gearing ratio reflected the lower company adjusted EBITDA in 2023.
